Reasons to Have a Board of Directors
Most new companies start without a Board of Directors. When a company is not publicly held, there are no legal reasons to have a Board yet many private companies, especially if they have been in business for awhile and have a number of employees, have Boards. Why? Because they are an important resource and ingredient for corporate success. So the question is: when should a company have a formal Board of Directors?
There are certain dynamics an entrepreneur should consider when having a Board. One good reason stands out the most: a competent Board provides objective input about the strategic direction of a company and helps with other corporate matters. For instance, venture capital or angel investments will most always want to see an independent Board of Directors because it provides them with some level of confidence that the company is strategically focused.
As brilliant as an entrepreneur might think he or she is, when you surround yourself with a Board that is not afraid to ask the tough questions and make recommendations on operational, financial and corporate strategies, your chance of success increases dramatically. However, there are also plenty of small privately owned companies that do quite well without a Board of Directors. It really depends upon the individual running the company and the complexity of the business. When an entrepreneur understands what they don’t know and hires a Board with expertise in multiple business functions, your chances of success goes up. So how do you choose a Board? Most good Boards have the following expertise:
Legal – It is a really good idea for your company to have some legal representation on the board; and choose an ethical attorney, preferably one with experience in your industry.
Financial – Preferably someone with a financial background (i.e. CPA) who can serve as a financial watchdog and who can advise the board of concerns and if anything improper might be happening with the company’s books.
Technical – Having someone on your board that is familiar with the workings of your industry is a great idea. This person should have important contacts in the industry and can assist the board and management on technical and strategic decisions.
Sales/Marketing expertise – A strategic marketing person can help you grow and identify markets. He or she should be able to strategically advise the board as to marketing directions for your product or service.
Prominent figure – This is a person who can help get you exposure, and is usually a prominent individual who connects with the community at large but is also willing to participate. This is generally a highly visible person who might have retired from corporate or government service and has impeccable standards. A highly regarded board member also can really help with the public perception of your company.
Other expertise – You can fill other slots on your Board who might have expertise in corporate governance, labor issues, public policy, regulatory matters or anyone else that you feel can provide value and expertise to help your business grow.
I have heard over and over again that you should have an odd number on your Board but I think that the number in and of itself is not that important. What’s important is that you have a real Board that can rein in management if they see it’s going in the wrong direction. Some people are appointed to a Board simply to provide a rubber stamp for management or as a formality, like appointing friends and family. That is a big mistake because an effective Board can really assist a company in its growth and makes the tough decisions if done properly.
If you would like help or would like to learn more about choosing a Board of Directors contact me via email@example.com.